More ideas for direct ECB payments to Eurozone citizens

I've been thinking more about how the European Central Bank should get freshly created debt free money into the Eurozone economy. Following my post last week, I'm increasingly convinced that the best way to get money directly from a Central Bank into the economy might well be to short-circuit politicians completely, and directly credit the bank accounts of citizens.

Suppose that, in its wisdom, the European Central Bank decides that the Eurozone needs another €1 trillion to get the economy moving. Given that the total Eurozone population is 333 million, this works out at €3000 per man, woman and child. Under the current arrangement, the European Central Bank's main options for getting more money into the economy involves adjusting the interest rate at which it provides funds to the banking system. But this is clearly not an efficient way of controlling the money supply - nobody can oblige commecial banks to make loans. And when they do make loans, this is just increasing the amount of debt in the system.

Injecting money directly into the economy debt free by adding money to the bank accounts of European citizens would be far more efficient, and would allow the money supply to be increased without increasing debt levels.

But what would be the best way to do this? Should the ECB transfer money to the conventional bank accounts that citizens have with their local banks? While this is possible, it seems to me that there may be an even better option.

My suggestion is that the ECB should itself open accounts for every Eurozone citizen. Literally, this could simply involve creating the equivalent of an enormous Excel spreadsheet, with one entry per citizen.  Initially, all those accounts would have an entry of €0.00. But, if the ECB decides to increase the money supply, it would simply add the appropriate sum (be it €10, €100, €1000 or whatever) to the account.  It would be as simple as pressing a key on a computer. (Yes, that is all that is needed to create money!).

How would people spend this money? Well, I would suggest that they would be able to link their conventional bank account to the ECB account, much as you can link a bank account to a Paypal account. This would mean that you could then transfer the money on the ECB account to your conventional account, at which point you could then use it as you would use money normally.

Note that the ECB account could only be positive. There would be no way for a citizen to become overdrawn on their ECB account because they simply would not have the option of transferring more money than there was credit on the account.

One other interesting possibility is that citizens would also be able to transfer money from their conventional bank account to the ECB account. Why would they do this? Well, the ECB would not be paying interest on the sums held on their accounts. On the other hand, any money that was held by the ECB would be absolutely safe. There would be no way that you could lose the money, irrespective of what happens to the rest of the banking system.

This idea is actually very close to the notion of "transaction accounts" that the Positive Money group has been proposing in the UK. Their idea is that the "current accounts" in the banking system should effectively be accounts held with the Bank of England. As with the current proposal, those accounts would be guaranteed by the Central Bank but would not get any interest. If someone wanted to get interest, they would need to transfer their money from the transaction account to an investment account, which would have an associated level of risk.

Both Positive Money's proposal and my own have the major advantage that it would no longer be necessary for governments and central banks to guarantee money deposited with commercial banks. This would remove the massive hidden subsidy that has been artificially propping up the commercial banking industry at tax payers expense, and has encouraged reckless behaviour by bankers.

In Positive Money's proposals, your money would be safe while it was in the transaction account (effectively with the Bank of England). Withe the current proposal, the European Central Bank would actually have a safe account for each citizen - a place where it would be easy to transfer money for safe-keeping. But at the same time, it would also provide an easy way for the ECB to be able to directly increase the amount of money in the system.

I would propose that the ECB would only have the ability to put money into these ECB run accounts. While you could in principle tax people by withdrawing money from their accounts, I think this would be a bad idea. For a start, if you were to apply a €100 tax to all citizens by reducing the ECB account balances by €100, what would happen to an account that did not have €100 in it? As I have already said, I strongly believe that such accounts should only be positive.  No, I think that if the ECB wanted to reduce the amount of money in the system, the best way would be to apply a very small FTT to the roughly €1.6 quadrillion of transactions that occur in the Eurozone each year. That way, there would be no way of causing people to go into debt. If you can't afford the 0.05% fee for transferring money from A to B, don't make the transfer.

Finally, why do I think that directly crediting citizens is better than providing money to governments? Well, one reason is that if the ECB wanted to inject €1 trillion into the economy and did it by transferring the sums to the 17 Eurozone governments, it would be much harder to be sure that the money really did get into the economy. Providing money to governments does have the risk that money could end up being used for corrupt practises. Who knows what proportion of money provided directly to the Italian government would end up with the Mafia? Directly crediting the accounts of individual citizens would completely avoid this sort of risk.

Any comments?